Nasdaq Is Controlled by Traders, Report Says : Stocks: Executives from 18 big firms have repeatedly thwarted bids to change the market’s operation, Rudman panel says.

Deep inside the study of the Nasdaq stock market issued last week is a revealing explanation of who really runs the nation’s second-largest stock market.

It is not the board of directors of the National Assn. of Securities Dealers, which owns the market, nor the board of Nasdaq itself, but a powerful committee of traders that has largely usurped the authority of both boards, said the committee led by former Sen. Warren Rudman that studied Nasdaq.

“The review turned up no instance in which the NASD board itself initiated a major policy or rule for the Nasdaq market,” the panel reported.

Most of those interviewed for the study characterized the Nasdaq board as having “less influence than certain NASD committees . . . and little, if any, authority over the Nasdaq market and systems.”

Efforts to make the Nasdaq market work better for investors and corporations have been repeatedly blocked--sometimes for years--by the NASD’s trading committee, made up of executives of 18 big firms that deal in Nasdaq stocks, according to the report.

The Washington-based NASD is facing public criticism as well as federal investigations over allegations that small investors fail to get the best prices on stocks and that conflicts of interest prevent it from operating efficiently. NASD officials deny the accusations.

After studying Nasdaq since December, Rudman’s panel issued a report last Tuesday that calls for separating the operation of the Nasdaq Stock Market from the NASD’s duties as a regulatory entity.

Sources familiar with the work of Rudman’s committee say they believe the goal of the recommendations is to break the influence of the trading committee and restore power to the boards.

The 400-page report portrays the NASD--which both owns and regulates Nasdaq--as an organization often becalmed by gridlock because it cannot reconcile the opportunity to make money with the best interests of investors.

The NASD and Nasdaq have separate boards of directors that are legally responsible for overseeing the market, but, the report says, they have lost their power to the traders, who resist regulations that might benefit investors but cost them business.

The trading committee “was not designed to be a central governing body or to exert regulatory authority,” the Rudman panel found. But the committee “has the capacity to block or delay significant Nasdaq regulatory initiatives with which it disagrees.”

The trading committee now is headed by James Bellini, chief stock trader for Dain Bosworth & Co., a big Midwestern brokerage firm based in Minneapolis. Bellini said Thursday that he has not read the Rudman report and could not comment on it.

The Rudman group suggested an organization with three boards of directors--an eight-member board for NASD, a 16-member board for Nasdaq and a 28-member board to set policy for a new organization to be called NASD Regulation Inc. Five of the NASD board members should be from outside the industry, the report said, and so should a majority of the members of the other two boards.

Some experts on corporate structure are skeptical about whether an organization with three boards, 54 board members, three chief executives and three staffs can work.

“The trend on public companies is toward is a smaller board,” noted Steven Kaplan, a professor at the graduate school of business at the University of Chicago.

“It does create more bureaucracy,” he said of the Rudman plan. “One thing it seems to do is possibly resolve some of the conflicts of interest, or certainly weaken them.”

Whether the Rudman committee plan for splitting the regulatory and market functions will work “will depend on whether it’s cosmetic surgery or brain surgery,” said Junius Peake, a longtime Wall Street executive who was vice chairman of the NASD board in the 1970s.